5/23/2012 @ 6:00PM

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While gas stocks are a rare hot sector in Hong Kong, future profits hinge on political decisions in Beijing. Last December two coastal provinces began to adjust city prices, pegging them closer to the cost of imported fuel. This is seen as a crucial reform if Chinas gas targets are to be realized. Last year Petrochina lost $3.3 billion on gas imports, effectively subsidizing consumers. Meanwhile, LNG prices in Asia are at record highs on Japanese demand, despite a glut of U.S. shale gas that has had the opposite effect.

Analysts say that companies need to know that they can pass on higher prices to end-users, if they are to justify further investment in capacity. As gas supply increases and more gas is sourced from overseas, it follows that the price of [downstream] gas will rise, says Stephen Oldfield, an energy analyst at UBS, which forecasts annual growth of 14.5% in gas consumption in China through 2020.

However, Chinese leaders tend to be leery of higher energy prices that impact inflation. It behooves private gas distributors to keep state interests close, though not too close, in order to keep their concessions and protect their margins. S.M.